How Massachusetts and Connecticut took separate credit paths

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Diverging economies and operating predictability shape the credit differences for Connecticut and Massachusetts, said S&P Global Ratings.

“Connecticut municipalities face a less predictable relationship with the state primarily due to sluggish statewide economic growth culminating in a tumultuous legislative session and four-month state budget impasse that introduced significant fiscal uncertainty for local governments,” said S&P.

“Comparatively, Massachusetts municipalities are in the midst of an economic boom that is outpacing regional and national trends and generally support stable local revenue performance.”

Connecticut on Tuesday sold $492 million of general obligation bonds. The state reduced yields by 10 basis points compared with Monday’s preliminary retail order period pricing.

According to Alan Schankel, managing director at Janney Capital Markets, the 10-year yield of 3.32% was 88 basis points over the AAA benchmark, the tightest in three months, but still higher than the same maturity yield of $1.2 billion.

The sale included a covenant that commits the state – over five years -- to four financial-restraint measures the General Assembly passed last year with its fiscal 2018 biennial budget.

Massachusetts intends to sell $225 million of Commonwealth Transportation Fund revenue bonds June 19 and 20.

The states' strengths, said S&P, are highly educated populations and strong wealth and income indicators. S&P rates 90% of Connecticut municipalities and 97% of Massachusetts municipalities AA-minus or higher.

“However, diverging economic growth patterns may lead to weakening credit quality in Connecticut and stable to strengthening quality in Massachusetts,” S&P added. “As in many states in the Northeast and Midwest, long-term liabilities including pension and [other post-employment benefit] expenses remain a growing risk for local governments in both states.”

The states’ post-recession economies signal a deepening divide, said S&P, as does their “legal and practical” environments.

Since the Great Recession, Massachusetts has largely kept pace with economic demands and changes, said S&P. “We believe that the dynamic growth within the Boston-Cambridge metro area buoys the surrounding municipalities and provides economic stability throughout the region.”

Connecticut, by contrast, has struggled to regain its economic footing, and according to S&P has yet has yet to regain its pre-recession employment, notably in the state’s financial sector.

“Complicating matters is that Connecticut lacks dynamic urban centers that drive population and job growth,” S&P added.

“The economic and budgetary pressures in Hartford, Bridgeport, New Haven, and Waterbury, four of the state's five largest cities – with Stamford the notable exception – highlight the disparate economic recovery between Massachusetts and Connecticut.”

S&P rates Massachusetts GOs AA, while Moody’s Investors Service and Fitch Ratings rate them Aa1 and AA-plus, respectively. All three assign stable outlooks.

S&P rates Connecticut GOs A. Moody’s assigns its A1 rating, while Fitch Ratings and Kroll Bond Rating Agency assign A-plus and AA-minus ratings, respectively. Kroll assigns a negative outlook, the others stable.

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